SUBWAY Franchise Horror Stories: How Not to Become One.

October 10, 2012

SUBWAY franchise horror stories are not that hard to find. If you’re thinking of buying an existing Subway franchise, following a few common sense insider tips can keep you from becoming one more cautionary tale.

Heard any good Subway franchise resale horror stories lately?

If not, here are a few for you:

> A buyer decides to purchase an existing Subway franchise without getting professional advice. He overpays for the store by approximately $60,000. When his cash flow cannot support him or his debt service, he asks a business broker to sell it for what he paid for it (ie, find another sucker to stick it with). The broker refuses to list it, as it’s clearly overpriced.

> A seller assures the buyer not to worry about the franchisor’s remodel requirement. It will be very cheap, he says. He had a friend who just remodeled his store for $15,000, he says. When the time comes to remodel, the price tag is $60,000. The new buyer is stuck, as he the remodel is required in his agreement.

> A seller assures the buyer not to worry about a new Subway store opening in the same market. “It won’t affect you at all,” he says. Once the nearby Subway opens his sales drop 30%. If he wants to sell, his asking price will be determined by the lower sales volume.

> A buyer purchases a Subway restaurant from his uncle. The uncle claims cash flow will be 25% of sales. The new buyer learns that cash flow is actually 12% of sales, and that his rent is too high. He tries to sell, but cannot get near what he paid for it.

> A buyer contacts an experienced consultant and tells him he has the “combo report” from the Subway he’s thinking of buying. The consultant offers to analyze the report and advise him on the health of the franchise location for somewhere between $495 – $995. The buyer balks at paying for advice, then invests $100,000 – $150,000, takes out a loan with a personal guarantee and signs a long-term lease. UnhappyFranchisee.Com awaits his arrival and participation.

Are you familiar with the SUBWAY franchise opportunity? Please share a comment below.

5 Things You Should Know Before Buying a Subway Franchise

Fayaz Karim (BSc, MBA, CA), is a franchise consultant, broker and Subway specialist with 25 years of experience.

He also publishes the Mr. Franchise Man website, and contributed the horror stories above.

1. You must know if the price you are paying is a fair price and the only way to find that out is with a Valuation or a second opinion from an industry expert. To give you an example: I had a call from an unknown person who said he had found a store with weekly sales of $2700 and a rent of $2000 a month, should he buy it? I did not need much more information. I said “run” and do not waste your time.

2. Make sure you know what the estimate is for a remodel if it is coming up in 12 months. It could be $6,000 or $30,000. You don’t need a surprise. Better still, get the seller to do it before transferring the store to you.

3. Calculate cash flows accurately and consider all expenses, even the pest control charges and costs for uniforms.

4. Ask for the COMBO sales report and get someone independent to interpret it for you. This is the most crucial report for analysis. It is like a blood test is to a doctor – he knows what it all means and can diagnose a sickness and order further tests to judge the health of the store.

5. Ask if there is another Subway store opening nearby in the future that could affect your sales and profitability.

According to Fayaz, most Subway owners, by and large, are happy. The fact that there are relatively few existing stores for sale, he contends, is proof of that.

However, Fayaz also acknowledges that many sad stories arise out of mistakes buyers make when getting into the system, such as the lack of due diligence, erroneous assumptions and cash flows, and overpayment for stores in a desperation to get in the Subway system.

He also states “There is no doubt that the ‘culture’ at Subway can be Gestapo-like, but it is not so everywhere; only in isolated areas and instances… The main question is how much of this ‘culture’ are you willing to put up with and for how long while you are making money?

“Why are there over 8000 franchisees in the system, and why are they yearning for and buying more stores?

“If the system was that bad, many more would be bailing out. Not so.

Thanks to Fayaz Karim for sharing his insights and advice on buying a Subway franchise.